Growing economic divisions in Europe

German GDP/capita due to grow 10% over a decadeThe decline of the euro periphery

by David Marsh

Mon 4 Feb 2013

Shortly after the fall of the Berlin Wall in November 1989, President François Mitterrand’s Parisian experts calculated that reunified Germany would experience a 10-year period of economic weakness before recovery set in. Then maybe it would once again become Europe’s dominant power – unless France took corrective action.

Mitterrand's officials got it wrong. The weakness in the German economy, when annual growth lagged almost permanently behind France's, continued from the early 1990s until 2005, the last year of Chancellor Gerhard Schröder’s seven-year term. Several reasons brought this about: a post-unification rise in German labour costs, an overvalued D-Mark when economic and monetary union (EMU) started in 1999, and successful 1990s structural reforms in France.

Over the last decade, especially since the transatlantic financial crisis of 2007-08, the picture has changed dramatically. Labour market and budgetary reforms under Chancellor Schröder eventually produced results. Other euro members slacked their reform efforts, but could no longer compensate through devaluation. So Germany was able to exploit to the full the big advantages of its industry-oriented economic base and its growing price competitiveness.

The painful phase of economic shrinkage in over-indebted peripheral states, made sadly inevitable by home-grown mistakes among EMU countries, has produced less disadvantages than expected for Germany as an export Weltmeister. This is because, during the last 15 years, the Federal Republic has cannily diversified its export markets far and wide beyond the borders of the euro area. So it’s much less dependent on demand from its stricken neighbours.

The resulting rise in German economic power, and accelerated decoupling between Europe’s biggest economy and other euro members, is exactly the opposite of what the euro’s initial supporters wanted and proclaimed would happen. In fact, one-time euro-sceptic Schröder accurately predicted such an outcome, along with others such as former Bundesbank President Hans Tietmeyer. But all that happened a long time ago, in 1997-98. And no one was paying too much attention at the time.

For the future cohesion of the European Union, EMU’s growing economic and industrial division is much more dangerous than the relatively innocuous British idea to hold a referendum on EU membership in 2017. The scale of the problem can be seen by latest forecasts from the International Monetary Fund. In the decade from 2007 to 2016, GDP per capita is likely to rise 10% in Germany, compared with stagnation in France (an increase of only 0.4% over the decade) and sharp falls in Greece, Italy, Spain and Portugal of 18%, 9%, 6% and 3% respectively.

The most important splits in the euro area are often thought of as between creditors and debtors. But a still more profound fault line runs through the fields of technology, economic advancement and industrial structure. Just look at developments in Europe’s automobile sector in the last 20 years. High value-added research and development projects are progressively migrating from the periphery to Germany and central Europe, along with skilled workers.

An unstable and potentially explosive mix. Naturally, the Germans say they want to 'do something' for Europe. But it’s hard to believe that creditor countries will continuously stump up cash and guarantees to support poorer brothers who are becoming politically ever more querulous and economically ever less relevant.